Analysis of the External Environment

Organisations and Environment Analysis of the External Environment

The dimension of the external environment which interests me the most is the economic dimension. Economics can be described as the social science that deals with the production, allocation and distribution of scare resources in order to please the unlimited wants and needs that individuals boast. Economics is also research into aspects such as interest rates, inflation, gross national product and unemployment in order to predict the direction of the economy. There are different elements of the economic environment which have different importance. One of the most important elements of the economic environment is scarcity. The reality of scarcity is that the resources that we use and need to produce are limited but in fact the wants and desires of humans for goods and services are almost unlimited. This causes the production, allocation and distribution of the resources to be carefully thought about. Costs are another key element in economics. This is because incentives influence everyone. The costs of products will seemingly come done to the incentive of people; costs will rise if product sell, consumers however may discontinue to buy that product due to this increased price. People are influenced by changes in their personal costs and benefits (Gwartney and Stroup, 1998). Trade is also a key element to economics. Trading is essential as is it very productive for all involved. If trading between countries didn 't occur then we would not have what we want, it is essential in order to gain what we value the most.

Economic development is continually occurring in conjunction with change this is because economic development occasionally depends on change. A major issue which is seriously able to hinder economic development is unemployment. It is essential for people of a certain age to work; if they do not then the economy will suffer. It is understandable that the goal of ‘full employment ' which the government strive for is virtually impossible, but mass unemployment causes the taxpayer to suffer and puts a strain on public services and on the Exchequer because tax yields will have to be spent on providing unemployed people with a Job Seekers Allowance. Also unemployed people are not being productive as they are not contributing to the advancement of the economy and as they are not receiving a wage then there will be a lack in demand and spending on goods and services, which will affect businesses and will slow economic growth. However statistics now show that unemployment is lowering and this will be due to the economy gradually developing. The government as also trying to cut unemployment by using a supply side policy of decreasing the disincentive to work, for example lowering the Job Seekers Allowance and making it a lot harder to qualify for it.

Technological change is extremely influential on economic development as it has greatly increased efficiency in businesses. A technological advancement which has benefited industry is information technology. Communication and production has because increasingly effective and communication can now nearly take place between two people who are thousands of miles away from each other. Fax machines, e-mail and video conferencing has all contributed to making it possible for people to work anywhere in the world. The design and production phase will shorten greatly with the use of computer-aided design (CAD). This will increase efficiency and shorten the life cycle of the product. Both of these technological improvements in industry will increase the development of the economy because if firms are more efficient and effective then it saves then a lot of money which may be invested into other areas which need improving or used in order to lower the overall price of the good or service, which will increase demand and then supply.

Within economics, economists distinguish between two broad levels of analysis in which to understand and analyse the problem of scarcity and its constituent parts. The two types of analysis are microeconomic analysis and macroeconomic analysis. Microeconomic analysis is when we analyse the economic decisions that both individuals and firms undertake and macroeconomic analysis looks at the whole economy as one and it looks at the interactions in the complete economy.

Microeconomic analysis looks at the prices, supply, distribution, change in wage rates, etc. of individual firms or a group of competing firms. The price change of a good or services will either severely transform the demand for it or it will not change the demand. Most economies in the world are market-based economies and they are known for reacting over a price mechanism so therefore the prices of products and services need to be carefully thought about. A way that we can accomplish this is by using price elasticity of demand in order to measure. Price elasticity of demand measures how the demand for a product changes in response to a change in price (Marcouse et al, 2002). A product or service can be either price elastic, which is a product that is high price sensitive, for example a luxury holiday, and price inelastic, which is a product that is not really price sensitive, for example toilet roll. It is important for a firm to use this correctly because if the price elasticity of demand is incorrect and a firm increases the price of a product but the product is actually price elastic demand will fall rapidly, which may cause the firm to make some redundancies, which increases unemployment, or even close.

Macroeconomic analysis deals with inflation, interest and exchange rates, unemployment, economic growth, etc. It is concerned with the whole economy and not individuals and sometimes macroeconomic and microeconomic analysis does interlace, but this is inevitable. It is important to analyse these factors because if they weren 't measured and then stabilised then the economy would suffer greatly. Inflation is the general rise in prices and a stable increase in inflation is around 2.5%. Inflation is not a threat when rising slowly if other factors such as wage prices are rising therefore no-one loses out. However if the increase in inflation rises rapidly then it could effect the business environment immensely. For example if there is high inflation then a lot of pressure will be put on a firm 's cash flow because materials and equipment are becoming increasingly expensive. Also staff within companies become a lot more wage conscious as amenities are rising in price therefore they want a higher wage which therefore leads to industrial disputes and labour turnover tends to increase, and having a high labour turnover is very costly for a firm.

High inflation poses a threat to the economy so therefore the government would intervene in order to try and stabilise economy, if they didn 't the business environment would suffer. The way the government would do this is to put into force the fiscal or monetary policy or both. The fiscal policy is when the government changes the amount of money put into government spending and the price of taxes. This is done in order to influence demand because if taxation is increased then it is most likely that spending and demand will decrease and the opposite will occur if taxation is reduced. It is basically a policy which reduces taxpayers spending power. Fiscal policy can also be directed at particular groups through changing direct taxes, income tax, or indirect tax, VAT.

The monetary policy is concerned with monetary variables like interest rates and money supply and the government do not determine this, the Bank of England committee oversees the monetary policy. Each month they meet and decide whether to put into action any changes in the interest rates. Interest rates are the cost of borrowing and the reward for saving. Change in the interest rates will defiantly affect firms and the business environment, for example, if interest rates fall then saving becomes less attractive as there is not a large enough incentive and home-owners have a more disposable income due to lack of saving and variable mortgage payments falling. Therefore demand for consumer goods increase and then demand increases which then may lead to an increased price for a good or a service, which in turn will result in inflation. However while this is taking place the government and the Bank of England committee would intervene in order to stabilise the inflation rate. A fall in interest rates would also be beneficial for firms as their interest costs fall which benefits highly geared firms and investment becomes more attractive which would boost the economy.

The economic dimension of the business environment is extremely important, maybe even the most important. The political, social and technological dimensions are also somehow intertwined with the economy. If the economic dimension was not carefully balanced and controlled then the external environment would certainly not prosper. Resources would not be carefully produced, allocated and distributed which would cause a lot of waste and resources would run out quickly which would be terrible for the economy and growth. Businesses would also be affected as the may not be able to buy the raw materials they need to produce because the resources would have ran out. Inflation that becomes out of control would cause a lot of problems for a business due do raising prices and demands for higher wages. The unemployment factor of the economic dimension influences businesses greatly. This is because is unemployment is forgotten then it would most likely rise. If there is high unemployment then when employing the firm would be able to offer low wages because there would be so more people to choose from and more people want work, this is beneficial for businesses because it reduces their expenditure on wages, which will therefore leave more money to be invested into another aspect of the firm.

In conclusion the economic dimension of the external environment is extremely important for business as it could affect them immensely for either better or worse. A stable economy is not just important for businesses to stay healthy but is it also for growth as that is what all governments and countries aim for.

References

• James D. Gwartney and Richard L. Stroup (1998) Ten Key Elements of Economics. Heartland Institute [Internet], February 1. Available from: [Assessed 10th January, 2006]

• Worthington I. & Britton C. (2003) The Business Environment. Pearson Education Limited. Fourth Edition.

• Marcouse I., Gillespie A., Martin B., Surridge M. & Wall N. (2002) Business Studies. Hodder & Stoughton.

• Economics (2006) Definitions [Internet]. Available from: [Accessed 10th January, 2006]

References: • James D. Gwartney and Richard L. Stroup (1998) Ten Key Elements of Economics. Heartland Institute [Internet], February 1. Available from: [Assessed 10th January, 2006] • Worthington I. & Britton C. (2003) The Business Environment. Pearson Education Limited. Fourth Edition. • Marcouse I., Gillespie A., Martin B., Surridge M. & Wall N. (2002) Business Studies. Hodder & Stoughton. • Economics (2006) Definitions [Internet]. Available from: [Accessed 10th January, 2006]